A recent rally in the U.S. stock market, powered by artificial intelligence, faltered in August as the S&P 500 index and the Nasdaq Composite headed for their largest monthly declines this year. However, as we approach September, which has a historical track record of increased volatility, the market could experience even more turbulence. Since 1945, the S&P 500 index has seen an average monthly return of negative 0.73% in September, making it the worst-performing month on average, according to Sam Stovall, chief investment strategist at CFRA Research. It’s also the only month where the S&P 500 has more often declined than increased, with a "win rate" of just 44%.

Meanwhile, the tech-heavy Nasdaq Composite has also seen its only negative average return in September since 1971, with an average return of negative 0.86%, as per CFRA. This year’s rapid ascent of the U.S. stock market hit a roadblock in August after strong economic data sparked concerns that the Federal Reserve might maintain higher interest rates for longer than expected, resulting in a spike in longer-dated Treasury yields. The S&P 500 is down nearly 2% this month, on track for its most significant monthly drop since February. However, if history is any guide, a fall of 2% or more in August often precedes even worse returns in September.

US Stock Market: A Turbulent September Ahead?

The US stock market, driven by a powerful artificial intelligence rally, experienced a slowdown in August. As per the trends, the S&P 500 index is predicted to have its worst month in six, and the Nasdaq Composite is set for its most significant monthly decline this year. However, if history is any guide, September, which is just a few days away, could be even more volatile.

A Historical Perspective

The S&P 500 index, since 1945, has reported an average monthly return of negative 0.73% in September, marking it as the worst performing month. This data was presented by Sam Stovall, chief investment strategist at CFRA Research. The index was also the only one to see more frequent monthly declines than rises, with a "win rate" of just 44%.

This trend extends to the technology-heavy Nasdaq Composite as well. It recorded its only negative average return since 1971 in September. The index rallied only 52% in the same period, with an average return of negative 0.86%, according to CFRA.

Current Market Conditions & Future Predictions

The rapid climb of the US stock market this year met a bump in August. Strong economic data raised concerns that the Federal Reserve will maintain higher interest rates for a more extended period than expected, leading to a jump in longer-dated Treasury yields. The S&P 500 has lost nearly 2% so far this month, on track for its biggest monthly decline since February. In line with this, the Dow Jones Industrial Average was down 1.8%, and the Nasdaq Composite has dropped 2.9% month-to-date.

However, the market volatility seen throughout August is not over. Richard Saperstein, chief investment officer at Treasury Partners, expects continued volatility in September as the market starts to factor in a slowdown in economic activity caused by the lag effect of the Fed’s past rate hikes.

An Optimistic View

Contrary to the general sentiment, Mark Newton, head of technical strategy at Fundstrat Global Advisors, suggests that September might not be as negative as many investors anticipate. In pre-election years since 1935, the first half of September tends to be much better than the second half. Also, while the median return is negative 0.04% for September in pre-election years, the average return has been positive since 1935, with returns of 0.2%.

Newton believes that a negative stock-market return in September is less likely this year due to various technical signs suggesting a stock-market rally should get underway.

Final Thoughts

The recent decline in stock-market sentiment, peaks on the U.S. dollar and U.S. Treasury yields, and the weekly AAII Investor Sentiment Survey results all suggest that the stock market might be on the cusp of a rally. As Newton suggests, "a low [in the stock market] is right around the corner, and markets might be able to experience gains in the first half of September". However, given the historical data, investors must prepare for potential volatility and fluctuations in the market.